The first federal payrolls report of 2023 indicated disinflationary pressures appeared to have stalled as goods prices moved upward and revisions boosted core inflation in the fourth quarter, the researchers said.
The FOMC has been raising interest rates for nearly one year to guide inflation down to its 2% target. The widely watched CPI report for January had aFebruary CPI data are due March 14. Barclays said the Fed would most likely downplay a soft CPI number on the grounds that one month is not informative about inflation's evolution given ongoing pressures on core service inflation from the tight labor market.
"The bottom line is that in the absence of a disappointing February employment release, we think a 50bp hike in March, followed by two additional 25bp hikes in May and June, will become a much more plausible outcome," said Giannoni. Such moves would put the peak of the Fed's benchmark interest rate at 5.5%-5.75% assuming that after June, the Fed sees sufficient evidence that slowing in employment and wages warrant a pause in rate hikes, Barclays said.
"In such a scenario, the FOMC would most likely look to hold rates higher for longer, calling into question the 25bp cut we are now penciling in for December," said Giannoni.
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